Quarterly NAV announcement and business update

RNS Number : 6936N

The MedicX Fund Limited

10 August 2017

 

For immediate release                                                                           

10 August 2017

MedicX Fund Limited

("MedicX Fund", "the Fund" or "the Company")

Quarterly Net Asset Value ("NAV") announcement and business update

MedicX Fund Limited (LSE: MXF)( "MXF", the "Fund" or the "Company", or together with its subsidiaries, the "Group"), the specialist primary care infrastructure investor in modern purpose-built primary healthcare properties in the United Kingdom and Republic of Ireland ("RoI"), today announces its quarterly NAV as at 30 June 2017.

Summary of Net Asset Values

	30 June 20171	31 March 20171
NAV (£'000)	316,504	299,481	+5.7%
NAV per share (pence)	73.9	72.7	+1.6%
EPRA NAV (£'000)	323,463	306,440	+5.6%
EPRA NAV per share (pence)	75.5	74.4	+1.5%
EPRA NNNAV (£'000)	275,767	256,259	+7.6%
EPRA NNNAV per share (pence)	64.4	62.2	+3.5%

¹ unaudited

Market update

The need for modern purpose built primary healthcare premises remains a high priority in order that the NHS can deliver its five year forward view. Despite wider market uncertainty following the result of the EU referendum, primary healthcare property remains a compelling investment proposition as well as being important for society in general. Underpinned by a high quality portfolio with secure, long term income and funding, the Company continues to demonstrate resilience and is well positioned for the future.

The demand for primary care infrastructure remains strong in both the UK and RoI, political and cross-party support remains in place since the UK general election. The UK government has confirmed an additional £325 million to the NHS to support the 15 strongest Sustainability Transformation Plans ("STP"s) being those that have made the best progress in defining the clinical strategies in each area. The UK government has also promised more will be available in the Autumn budget for other STPs as their strategies evolve. There continues to be a move towards areas forming Accountable Care Organisations ("ACOs") which will lead to a locally integrated health system needing new premises solutions to deliver cost savings. Final funding allocations will be made upon business cases being successfully approved and will depend on robust wider estates and capital strategies.

As well as rising clinical demand and transformation from the UK government and the NHS, it has been well publicised that pressure on GPs continues to mount from increased regulation, rising numbers of consultations and recruitment challenges. Practices are continuing the move towards more collaborative working either through Federations, Super Practices or the emerging ACOs.

In the RoI there are similar demographic pressures requiring new primary care infrastructure and the Irish government continues to support their Primary Care Centre strategy delivering modern purpose built centres serving the local community. The Fund continues to build strong relationships with framework developers and now has four schemes committed. Mullingar is now fully let having reached practical completion in February. The schemes at Crumlin and Tallaght are due to reach practical completion in September and December 2017 respectively and the remaining scheme at Rialto is due to be completed in the second half of 2018.

The primary care investment sector has continued to see further yield compression during the period due to investor demand, reinforcing the attractiveness of the asset class. Market rental growth remains challenging for the sector due to a lack of new schemes to set new rental evidence but there is increasing acknowledgement from District Valuers that rising land costs and build costs are supporting higher rents for new schemes. In addition, UK RPI inflation increased 3.5% over the twelve months to 30 June 2017 providing another strong indication of upward pressure on market rents.

The Fund continues to invest in "best in class" properties that meet the requirements of the STPs' underlying clinical and estates strategies and which will generate long term returns for shareholders. The Fund is well positioned to deliver new schemes by working closely with its preferred developers and provider groups to help the project commissioners transform the provision of primary healthcare.

Quarterly valuation

The quarterly valuation of the Fund's UK portfolio as at 30 June 2017 undertaken by Jones Lang LaSalle LLP stood at £653.7 million (31 March 2017: £645.6 million) on the basis that all properties were complete. This reflected a Net Initial Yield of 5.12% (31 March 2017: 5.17%). Excluding property acquisitions and disposals, the valuation uplift on a like for like basis was 0.73%.

In addition to this, as at 30 June 2017, the completed value for the Fund's four assets in the RoI amounted to €46.0 million. During the quarter to 30 June 2017, the net book value of the portfolio increased by 1.7% to £671.6 million (31 March 2017: £660.2 million). This was as a result of a £4.6 million valuation gain and £6.8 million of capital investment.

In addition, the Fund deployed £1 million into its joint venture with General Practice Investment Corporation Limited for the acquisition of a standing let GP Surgery in Lewisham, which was in line with its investment strategy.

Discounted cash flow valuation of assets and debt

The Investment Adviser has undertaken a discounted cash flow ("DCF") valuation of the Fund's assets and associated debt at each period end. The basis of preparation is similar to that calculated by infrastructure funds.  The values of each investment are derived from the present value of each property's expected future cash flows, after allowing for debt and taxation, using reasonable assumptions and forecasts based on the predominant lease at each property.  The total of the present values of each property and associated debt cash flows so calculated are then aggregated with the surplus cash position of the Fund.

At 30 June 2017, the DCF valuation was £427.3 million or 99.7 pence per share, compared with £405.4 million or 98.4 pence per share as at 31 March 2017.

The assumptions applied remain unchanged to those used in previous periods. The discount rates used were 7% for completed and occupied properties and 8% for properties under construction.  The weighted average discount rate was 7.07% which represented a 5.11% risk premium relative to the 20 year gilt rate of 1.96% at 30 June 2017. 

The discounted cash flows assume an average 2.5% per annum increase in individual property rents at their respective review dates and also assume the level of gearing and cost of debt are maintained at current levels. Residual values continue to be based upon capital growth at 1% per annum from the current valuation until the expiry of leases (when the properties are notionally sold). 

Rent reviews

From 1 October 2016 to 30 June 2017, 76 rent reviews were completed establishing an uplifted rent roll of £7.64 million, an increase of 0.98% (year to 30 September 2016: 1.20%). Of these reviews, an uplift of 0.36% per annum was achieved through open market reviews, an uplift of 1.66% per annum was agreed for RPI reviews and 2.38% per annum was agreed on fixed reviews. Outstanding reviews of £21.62 million (30 September 2016: £16.1 million) of passing rent currently remain under negotiation.

Investment activity

As at 30 June 2017, practical completion has been certified at Streatham, Brynhyfryd and Mullingar and all tenants are now in occupation at those centres. In March 2017 the Fund committed to forward fund Cromer medical centre, which will generate a rental income of £0.2 million per annum once completed. The Fund also completed the acquisition of three standing investment properties; Leavesden, Walsall and Birmingham. The combined rent for these three standing let properties is £1.2 million per annum.

On 23 May 2017, the Fund announced it had committed to its fourth acquisition in the RoI having contracted to acquire, by way of forward funding, a new primary healthcare medical centre in Tallaght, Dublin. Upon completion, the building will be let to a number of GPs, the Health Service Executive ("HSE") and a pharmacy operator. The GP and Health Service Executive leases will be for a term of 25 years from practical completion and the pharmacy term will be 15 years. The rent for all tenants is subject to five-yearly CPI reviews. The total acquisition cost of the property and the refurbishment works will be approximately €15.5 million.

At 30 June 2017, five properties were under construction at Brynmawr, Cromer, and in RoI at Crumlin, Tallaght and Rialto, the first four of which are due to complete within the next twelve months with Rialto due to complete towards the end of 2018. Additionally, the Fund is soon to enter into a project contract to extend the new scheme at Mullingar by over 900m² to accommodate another HSE department.

The Investment Adviser has access to a strong pipeline in both the UK and RoI with approximately £80 million of assets either in solicitors' hands or under negotiation.

Loan facilities

On 26 July 2017, the Company raised £27.5 million through a private placement of loan notes bought by a new institutional lender to the Fund. These loan notes have a duration of eleven years and two months maturing on 30 September 2028, with no amortisation and the principal value repayable on maturity.  The interest rate on the notes is fixed for their term at 3.00%.

This new facility, together with the full draw down of the Bank of Ireland development loan facility put in place in March 2017, results in a reduced average all-in fixed rate of debt for the Fund of 4.27% with an average unexpired term of 12.7 years. Assuming the funds were fully drawn immediately with the proceeds invested in the completion of existing properties under construction or the purchase of new properties, adjusted gearing (the ratio of total debt to total assets in each case net of cash and cash equivalents) would be approximately 53.7%, in line with the Fund's gearing strategy.

Share issues

During the quarter ended 30 June 2017 the Company issued 16,500,217 Ordinary Shares of no par value at an average price of 88.15 pence per share. All shares were issued at a premium (net of costs) to NAV and were therefore accretive to existing shareholders.

On 30 June 2017 the Company sold in lieu of cash dividends, 147,743 Ordinary Shares from treasury pursuant to the Scrip Dividend Scheme, based on a scrip calculation price of 90.30 pence per share.

Following the scrip dividend, the total number of Ordinary Shares of the Company in issue at 30 June 2017 was 436,002,399, of which 7,472,150 were held in treasury. The total voting rights at 30 June 2017 were 428,530,249, with each Ordinary Share carrying one vote.

There have been no share issues since the quarter end.

Dividends

On 28 July 2017 the Directors announced a quarterly dividend of 1.5p per Ordinary Share in respect of the period 1 April 2017 to 30 June 2017.  The dividend will be paid on 28 September 2017 to shareholders on the register as at close of business on 18 August 2017.  Shareholders will be offered the opportunity to take new Ordinary Shares in the Company in lieu of receiving a cash payment under the Scrip Dividend Scheme put in place on 5 May 2010.

The Company expects, subject to unforeseen circumstances, to pay dividends totalling 6.00p per Ordinary Share in respect of the financial year ending 30 September 2017, an increase of 0.05p per Ordinary Share over the previous year.

REIT Conversion

On 15 March 2017 the Fund announced its intention to become UK tax resident and convert into a Real Estate Investment Trust ("REIT"), with effect from 1 October 2017. Preparatory work is progressing well and it is intended that an Extraordinary General Meeting ("EGM") will be held during September 2017, at which shareholders will have the opportunity to vote on the special resolution to become UK tax resident and convert into a REIT. A shareholder circular will be published in mid-August which will provide further information on the planned detailed proposals and consequences as well as the anticipated benefits of the Fund's entry into the UK REIT regime.

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For further information please contact:

MedicX Fund                                                                  [phone]

David Staples, Chairman

Octopus Healthcare                                                     [phone]

Mike Adams, Chief Executive Officer

Canaccord Genuity Limited                                              [phone]

Andrew Zychowski / Helen Goldsmith

Buchanan                                                                      [phone]

Charles Ryland / Vicky Hayns

Information on MedicX Fund Limited

MedicX Fund Limited ("MXF", the "Fund" or the "Company", or together with its subsidiaries, the "Group") is the specialist primary care infrastructure investor in modern, purpose-built primary healthcare properties in the United Kingdom and Ireland, listed on the London Stock Exchange, with a portfolio comprising 157 properties.

The Investment Adviser to the Company is Octopus Healthcare Adviser Ltd, which is part of the Octopus Healthcare group. Octopus Healthcare invests in and develops properties as well as creating partnerships to deliver innovative healthcare buildings to improve the health, wealth and wellbeing of the UK. It currently manages over £1 billion of healthcare investments across a number of platforms, with a focus on five core areas: GP surgeries, care homes, special education schools, retirement housing and private hospitals. Octopus Healthcare is part of the Octopus group, a fast-growing UK fund management business with leading positions in several specialist sectors including healthcare property, energy, property finance and smaller company investing. Octopus manages £6 billion of funds for more than 50,000 retail and institutional investors.

Octopus Healthcare Adviser Ltd is authorised and regulated by the Financial Conduct Authority.

The Company's website address is www.medicxfund.com.  Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website), nor the contents of any website accessible from hyperlinks within this announcement, are incorporated into, or forms part of, this announcement.

The Company's Legal Entity Identifier is 2138008POF35FTNFCB25.

 

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